Some say Facebook's (NASDAQ:FB) $19 billion acquisition of WhatsApp will mark the top of the market. On the surface, the deal certainly sounds pretty lofty.
Even though it has 450 million users, WhatsApp made $20 million in revenues last year. WhatsApp is basically a text messaging app that undercuts telecom companies' text messaging plans. The company's business model is to charge an annual $1 subscription fee versus the traditional $10 or $20 per month that most telecom companies charge for text messaging.
The large value proposition is why WhatsApp grew so quickly.
The large value proposition is also why some investors worry that telecom companies such as Vodafone (NASDAQ:VOD) will eventually change the rules.
Social text messaging is a big threat to global telecoms. According to the research firm Ovum, social text messaging apps such as WhatsApp cost telecoms worldwide a total of $32.5 billion in text message fees in 2013. That number is projected to reach $54 billion by 2016.
To combat that trend, many U.S. telecom companies such as Verizon (NYSE:VZ) have bundled text messaging with data plans, and there is a worry that global telecom companies will do the same.
That scenario, however, is unlikely because if it made sense for telecom companies to do that, they would have done so already. Many global telecoms face fierce competition. If they bundled text messaging and data together at a more expensive price, a competitor would just undercut them by offering those two options separately.
Also, social text messaging apps can offer much more than text messaging. WhatsApp competitor, Line, offers very profitable online gaming and emoticons in addition to unlimited text.
In short, the market for disruptive technology still looks bright.
The Netscape moment
To some investors, Facebook's purchase of WhatsApp reminds them of the Netscape IPO.
In 1995, the moment that Netscape went public and had one of the largest stock pops in history, the rules changed.
Companies no longer needed to make profits. They just needed to have a large user base, great growth, and potential.
The moment gave investors a license to speculate and as the record shows, the market went crazy for five straight years afterwards.
Almost two decades later, Facebook's $19 billion deal gives strong reasons for the same.
The WhatsApp deal makes it easier for investors to justify higher valuations for disruptive companies. Investors are now more likely to value companies based on market capitalization per user rather than profit per user. They are more likely to value companies based on their potential rather than the present.
All of this is likely to stoke investor enthusiasm for tech growth companies and launch more IPOs.
The bottom line
Whether Facebook's acquisition of WhatsApp is really the Netscape moment is hard to tell. It depends on where we are in the market cycle. There are some good reasons that say we are not at the end of the market cycle. Most recessions occur because the Federal Reserve raises interest rates too far in its attempt to control inflation. Right now both inflation and interest rates are low. Also, 10 out of last 11 recessions were preceded by oil spikes, and oil has not spiked yet. The U.S. consumer, whose spending makes up for 70% of economic growth, is still confident.
Technology fundamentals are also much better than two decades ago. Many technology companies today are profitable. The overall market is much larger. There are around 2.7 billion Internet users in the world today versus the 275 million Internet users in 2000.
User engagement is much higher. People are more accustomed to using Internet services in their every day lives.
That being said, valuations are starting to get lofty, but the market can stay irrational longer than most people can stay solvent. In the long run, valuations still matter. In the short term, however, Facebook's acquisition of WhatsApp could be this decade's version of the Netscape moment.
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Jay Yao has no position in any stocks mentioned. The Motley Fool recommends Facebook and Vodafone. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.